Journal Report

Journal Report 18: How to Kickstart and Scale a Marketplace Business (2) – Phase 1: 🐣 Crack the Chicken-and-Egg Problem

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Once a marketplace business is operating, supply happily serves demand. However, when your marketplace is just getting started, you must convince one side of the marketplace to commit before the other side.  This is known as the “chicken-and-egg problem”, and solving it is one of the biggest barriers to launching a marketplace business. Below are the steps to crack this problem.

Step 1: Constrain the marketplace

The best way to get big is by first going small. The research points to two ways to constrain a marketplace:

  • (1) by geography. If the offering requires supply and demand to be in the same physical location, the constraint is always geographical. Otherwise,
  • (2) by category.

Step 2: Decide which side of the marketplace to concentrate on

The vast majority of successful marketplaces focused almost all of their resources on growing supply early-on

Step 3: Drive initial supply

The vast majority of successful marketplaces focused almost all of their resources on growing supply early-on

  • Direct sales: being a crucial lever for about 60% of the companies the researcher talked to.
  • Referrals: incentivizing existing supply to refer to new supply. About 1/3 of the marketplaces the researcher spoke with saw a lot of success here.
  • Piggy-back off of an existing network: About 1/3 of the marketplaces also relied heavily on this to bootstrap their supply growth. 
  • Word of mouth: a significant factor in the growth of early supply for about 1/4 of today’s biggest marketplaces.
  • Subsidizing: Similarly, about 1/4 of the marketplaces bootstrapped supply by this.
  • Employees are the early supply: to create liquidity and to better understand the problem space.
  • Single-player mode: offering that side a tool they find useful on its own.
  • Performance Marketing
  • Loops: finding a powerful supply-oriented loop (aka a flywheel, or virality), which drove early supply
  • Events: organizing events/meetups to help build early supply.
  • SEO/Content Marketing
  • Leverage your community: the most unique lever of supply growth.

Step 4: Drive initial demand

How soon you need to invest in demand depends significantly on

  • the strength of Product/Market Fit (PMF),
  • where growth is coming from, and
  • how easily you are acquiring supply.

Here are a few signals that tell you to shift your focus to demand:

  • Supply growth is coming easily;
  • Your supply is heavily underutilized
  • You have yet to prove that you are solving a problem for people.

How-to:

  • Word of mouth: the most important growth channel for over half of the companies.
  • Supply driving demand: the primary reason these companies focus almost exclusively on supply growth.
  • SEO
  • Performance marketing
  • PR
  • Loops
  • Referrals
  • Direct sales
  • Events
  • Single-player mode
  • Partnerships
  • Mobile

 

Content source: Rachitsky. L (2019) How to Kickstart and Scale a Marketplace Business – Phase 1: 🐣 Crack the Chicken-and-Egg Problem (Part 1/4). Available at: https://www.lennyrachitsky.com/p/how-to-kickstart-and-scale-a-marketplace?fbclid=IwAR3MYP03WysSGC-DC0PNj-iHDXjM3srCpFPt-EmQcxadNcyt7amiJwFvPBg [Accessed on Apr 22, 2020]

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